Tushar Poddar of Asia Economics Research at Goldman Sachs informs that they are bullish on India and that the Union Budget may boost long-term growth.
He does not foresee the Budget to address inflation concerns. In fact, he is surprised to see nothing major on inflation. In his view, this is a consolidation budget primarily.
What are your thoughts on what the Budget has delivered this time around, and your call on macro growth?
We think that this is a consolidation Budget; nothing has really changed much; no major reforms, no major tinkering with the tax system. The FM is trying to consolidate the revenue over performance that we have seen over the last year or so and in that sense it's much of the same.
In terms of underlying fundamentals we don't think much has changed, so we still are bullish on India, we think that the long-term growth potential in India remains very strong and the Budget may actually encourage that because it is going to spend on sectors which really need more spending like healthcare, education, infrastructure.
Infrastructure spending in India or capex is 1 per cent of GDP; its increase in this Budget is by 70 per cent to 1.8 per cent of GDP. But if you look at China it spends about 4 per cent of GDP on capex. So there is still a big gulf both in absolute terms and in percent of GDP and we think that the priority to those sectors will be beneficial for growth in the long-term, so we remain bullish on growth in the long-term.
Coming back to the other concerns that we found in the Budget; one was that we really didn't see much on inflation, we are very surprised that given all the pre-Budget talk and sort of hype about inflation, the real problem we would have expected is a larger reduction in the fiscal deficit and we didn't really see that in the Budget.
It is in line with the fiscal responsibility law but some over performance at this stage is warranted which was not forthcoming. So those are the two big takeaways for us is that the Budget which is going to be on balanced growth facilitating, so the India growth story continues but we don't see the Budget affecting inflation very much in the near-term. So that's the upshot of the Budget for us.
What did you make of FM's attempts to cool inflation using a few tools?
It was inadequate. I don't think that fiscal policy is really the right tool to manage inflation both in the short and in the long-term. What FM did on the customs duty cuts has been well discussed, and is definitely going to lead to some sort of downer on inflation.
But on the long-term sort of the supply side constrains I don't think the fiscal measures are going to affect inflation any time soon. We see inflation being driven by three factors; one is the base effect which have been pretty high and that's causing the inflation. We expect inflation to moderate in about three-four weeks as these base effects play out. Second is the demand pressure as growth is running above potential.
We expect growth to slow down in 2007 to about 8 per cent from 9 per cent levels that we have seen and Q3 numbers came out yesterday which indicated that growth had slowed down a bit to 8.6 per cent, which is in line with our thinking that the economy is growing above potential, potential being around 8 per cent.
Third factor obviously much in the public domain is the food prices, which requires more fundamental sort of thinking on agriculture and on agricultural policy rather than tinkering and doing some discretionary stop like banning futures trading etc.
So the Budget or fiscal policy is really not a place to tackle inflation. The thing that FM could have done is to remove fiscal stimulus and our calculation show that the fiscal impulse in the economy although negative, which means it, is sort of contractionary but not enough to reduce inflation We were expecting more movement on the fiscal deficit, some over performance to reduce aggregate demand from the government side which unfortunately did not come thereFor more such reports, log on to www.moneycontrol.com